The fast track

(Fortune Magazine) -- The sensation of speed is as muted as the Christian Lacroix interiors of the first-class carriages. Passengers stroll the corridors without lurching from side to side. Drinks at the bar are neither shaken nor stirred by the train's acceleration. Only the green rush of the Champagne countryside whooshing by at 200 mph vouches for the velocity of France's newest and fastest TGV, as it hurtles along the track from Paris to Strasbourg.

But despite the blur outside, it's easy to see why the opening of the TGV (for train à grande vitesse) Est Européen network this summer is a watershed event for high-speed rail in Europe. It's not because the new route adds some 200 miles to the continent's existing 3,100 miles of high-speed track, or because the world's fastest train service has slashed the journey from Paris to Strasbourg from four hours to a mere two hours and 20 minutes. Nor is it that German trains are running on French track for the first time since World War II.

More important is the territory traversed by the new line. Fought over for centuries, eastern France is one of Europe's great crossroads - the equivalent of North America's Cumberland Gap, the passage through the Appalachian Mountains that enabled settlers to pour westward onto the Great Plains.

This strategic region had been sidelined as the TGV pushed out to more populous parts of France with greater economic potential. Now, what French rail boss Guillaume Pépy calls the "missing link" in France's TGV network joins Paris and the entire French rail system to a dozen destinations in Germany, Luxembourg, and Switzerland via Strasbourg and other eastern French cities.

"It's a key step in the evolution of European transport," says Pépy, 49, CEO of France's state-owned railway SNCF, chairman of the Eurostar consortium, and high-speed rail's most powerful advocate. "Just imagine getting to Prague as fast as to Marseilles. High-speed trains will change Europe's geography."

But budget airlines have been doing that for the past decade or more, rewriting the rules and economics of the travel business along the way. So what makes Pépy believe that rail can crash the party? The simple answer is that Europe's high-speed rail network is in the midst of what the French call a "beeg bong," a cosmic event that has gone largely unnoticed but which promises a new golden age of rail, with high-speed trains whisking ever-growing numbers across the continent.

Ten European countries already boast high-speed track, and if current projects are completed, there will be 4,700 miles by 2010 and 9,300 miles by 2020 - a tripling of today's network at a cost of about $200 billion. In addition to TGV Est, this year alone will see new lines opening in Belgium, the Netherlands, and Spain, where a 375-mile Madrid-Barcelona link will cut the journey on one of the world's busiest routes from about seven hours to less than three.

Even slow-coach Britain is doing its bit. Although plans for a high-speed north-south corridor have been shunted aside, the long-awaited link between London's new Eurostar terminal at St. Pancras Station and the Chunnel will open in November, cutting 15 minutes off the 2 1/2-hour trip to Paris.

Call it the TGV effect - and it's having a big impact on how Europeans are getting around their crowded continent. Since the TGV Mediterranean service started in 2001, cutting travel time from Paris to Marseilles to three hours, rail's share on the route has jumped from 22%, to 69% last year, forcing EasyJet to abandon its Paris-Marseilles flights altogether.

Even before the new TGV Est opened, Air France had reduced its flights to Strasbourg from 12 to eight and canceled all flights between Paris and Metz. Eurostar now has 69% of the London-Paris market and 64% of travelers to Brussels. With the Thalys service between Paris and Brussels taking only one hour and 22 minutes, there is only one direct flight left between the two cities.

"High-speed rail has gone from something special to something that's expected," says independent transport consultant Reg Harmon. "That means it's here to stay, especially given the supply outlook for hydrocarbons." Pépy, who turned the TGV into France's low-cost airline without its ever leaving the ground, makes the same point: "As air travel becomes more of a hassle, high-speed rail is winning 50% of the traffic where rail journeys are 4 1/2 hours or less."

Although launched in 1981, the TGV didn't really hit its stride until 1997, when Pépy, then head of passenger traffic, decided to beat the upstart budget airlines at their own game. Armed with a yield-management system borrowed from American Airlines and $400 million in price reductions, he embarked on a volume policy that transformed TGV's fortunes. Within a year passenger volume had increased by 12% and profits by 8%.

Last year TGVs carried 100 million passengers on 800 daily runs, with a load factor of 75%. Success for the TGV (it is now one of France's top ten brands, alongside L'Oréal and Chanel) has also meant success for its parent, SNCF. Although the latter's freight operations are still a black hole, with $366 million in losses last year, the passenger side is in good shape, thanks to the TGV's profitability.

"The TGV accounts for only a third of SNCF's revenue," says Pépy, "but its fatter margins are the main reason why we delivered a net profit last year of $845 million on revenue of $8.5 billion."

Disruptions to air travel caused by stepped-up security and airport congestion are not the only explanation for defections to rail that have forced budget airlines to slash ticket prices. A growing number of passengers see trains as a more eco-friendly way to travel. SNCF provides an EcoComparateur on its website that compares price, duration, and carbon emissions for a particular route.

Plug Paris-Marseilles into the EcoComparateur for a one-way journey starting between 7 A.M. and 10 A.M., and it shows that the TGV trip will cost $218, compared with $901 for an Air France flight (there are no budget airlines operating on that route). The flight duration of one hour and 25 minutes beats the TGV's three hours and 15 minutes, but not if time spent getting to the airport from downtown Paris, checking in, and passing through security is taken into account. The air passenger will also be responsible for 346 pounds of carbon dioxide emissions, while the train traveler notches up only 22 pounds.

Still, it would be foolish to count the airlines out: European air travel is expected to double by 2020, according to Airports Council International, the airport operators trade group. And the Association of European Airlines says 160 million passengers took international flights within Europe last year, not counting charter and budget airlines, far more than the 15 million traveling across borders by train. (To put the trains-vs.-planes battle in perspective, it's worth noting that the automobile continues to command a majority of the European travel market.)

But the battle is set to become fiercer in January 2010, when airlines will have a chance to hit back on the rail operators' own turf, thanks to the EU-mandated opening of the international passenger train market. Like Europe's 1997 Open Skies policy, which introduced greater competition among carriers and made possible the rise of budget airlines, the new rail regime will enable carriers to run their own trains over European tracks.

Air France has already said it will operate trains, and others are expected to follow. Whether they will compete with existing rail operators or collaborate with them in joint ventures remains to be seen. But what's not in doubt is that if RyanAir can also become RyanRail, then Europe's railways face a major shakeout.

Across Europe budget constraints are forcing rail operators to seek productivity gains that could prove unpopular, particularly for SNCF's 220,000 employees, who wrote the manual on turning safety nets into hammocks. With privatization not an option, Pépy and his boss, SNCF president Anne-Marie Idrac, have their work cut out to make their trains run on time and more efficiently.

Germany's Deutsche Bahn is probably in better financial shape than others to survive the shakeout but will undergo a partial privatization next year that will force changes in the way it operates, notably its control of Germany's tracks.

As they work to put their own houses in order, Europe's train operators need to cooperate more if high-speed rail's potential is to be realized. Procurement habits, for example, need to change. Efforts so far by SNCF, Deutsche Bahn, and Italy's Trenitalia to agree to common specifications for a so-called HTE (High-speed Train for Europe) have failed miserably.

"Operators must define their needs and then step back and let the industry come up with a solution," says André Navarri, head of transportation at Bombardier, a Canadian train-car manufacturer. "The target now is lower procurement and operational costs, and for that we need to get away from over-specified trains."

Trains, particularly high-speed ones, need sophisticated, common signaling and control systems to prevent wrecks, but at the moment no fewer than 20 different systems are in use across Europe for both high-speed and conventional lines. The TGV Est network and its trains use the new common European signaling system, but the Thalys trains that serve Amsterdam, Brussels, Cologne, and Paris have seven different control and signaling systems to enable them to operate in four countries.

Even if safety is not compromised, such complexity is a recipe for unreliability, which means competitiveness takes a hit too. Japan's Shinkansen bullet train may be slower than Europe's newest high-speed trains, but a unified operating system helps to make it six times more reliable than France's TGV.

The European Commission has been pushing for a common European Rail Traffic Management System to reduce bottlenecks and make trains more interoperable, but implementation has been slow. Retrofitting track and trains is expensive, and operators have dragged their feet.

Brought in by the Commission to speed things up, Belgian businessman Karel Vinck doesn't doubt the challenge he faces: "Getting a common rail-management system is essential. To do that you need to change the mentality of the people running the railways."

That's no easy task if the TGV Est service - a joint venture between SNCF and Deutsche Bahn dubbed Alleo - is anything to go by. French TGVs and German Inter City Express (ICE) trains are now operating high-speed services between Paris and Strasbourg and the German cities of Frankfurt and Stuttgart.

But setting up Alleo was a lesson in culture clash. Germans like to turn up at the station and buy a ticket to ride; SNCF insists that seats on the TGV be pre-booked as on a plane. Neither side would budge, so both systems are in place, although a few seats are kept aside for customers boarding in France who are not pre-booked.

That wasn't the end of it. The Germans insisted on stronger brakes for the TGV, on drinking-quality water in the lavatories, and real porcelain coffee cups rather than plastic ones in the dining car. The French had their own list of modifications, which added more than $10 million to the cost of each train set. Much of that went to solve problems ICE trains were having with flying ballast on the French tracks. But there was plenty of petty stuff too.

French trains have a special seat with metal rings to which anyone arrested on board can be handcuffed. Now ICE trains have them too. ICE inspectors serve coffee and meals to first-class passengers as well as punch their tickets. But this was beneath the French controlleurs, so now only the Germans do double duty on the jointly manned trains. Pépy insists that TGV Est was not delayed by the squabbling, but even if the trains are running on time and not years behind schedule, as some critics claim, high-speed rail can't count on an easy ride.

Environmental issues can also cause delays. "On one TGV line," Pépy recalls, "we had to spend millions to build special viaducts for migrating frogs." By the time the TGV Est was completed, environmental and other pressure groups had forced the addition of 24 extra bridges, tunnels, and viaducts. In Champagne the line was diverted to protect some vineyards.

Resulting budget overruns mean TGV Est will lose $140 million in its first year, despite being sold out for the first three months, and it probably won't break even for another five years. And if activists can cause headaches, so too can the laws of physics and economics. France is working on increasing operating speeds to 224 mph, but as Pépy and others concede, that will produce an increase in both noise and energy consumption.

Tunnels are a particular problem, as air compressed by a speeding train races ahead of the locomotive and can burst out of the tunnel with a sonic boom. And the faster trains go, the more vulnerable they are to crosswinds. International Railway Association high-speed director Iñaki Barron points out that the TGV's recent record-breaking run of 357 mph shows that much higher speeds can be attained safely, adding that the trend has been for yesterday's speed record to become today's operational speed.

But it's clear that safety, environmental, and other considerations, including the law of diminishing returns (i.e., incurring ever-higher costs for ever-diminishing savings in travel time), will come into play. "You have to look at all the factors," says Pépy. "Gaining five minutes on the Paris-Lyon run might not be worth it. But if you can bring the Paris-Bordeaux route down under two hours, you may well rob airlines of their market share."

Happily for train operators, high-speed rail travel is not just about speed. It's also about comfort, convenience, and, increasingly, changing consumer habits. French architect Le Corbusier once asked why trains couldn't be like high streets with meeting places, libraries, cafés, and shops. Today's trains may not have all these facilities, but they are becoming more customer-friendly, both for business and leisure travelers.

On many of the TGV's new duplex carriages passengers can choose to travel in "zen" or "zap" zones according to their mood (zen for the quiet life; zap for those more inclined to party). Conference areas are available for business travelers, and parents with children will be able to play tabletop games or rent DVDs. Passengers get to walk around, talk on their mobile phones, enjoy more legroom, and pay no excess baggage charges.

"Trains may take longer than planes on some routes," says Pépy, "but I like to think in terms of people gaining time on trains rather than spending it." He also sees evidence that train trips are becoming not just a means to an end but an end in themselves. "I want people to buy a train journey for the fun of it, as they would a DVD or a theater ticket."

Call it the curse of the wish come true, but with the launch of TGV Est, the SNCF found itself overwhelmed by demand for seats. Its own forecasts had shown traffic growing by a greater rate than could be explained by people switching from air to rail.

Was it just the low promotional fares, or were all those extra people aboard for the fun of it? Perhaps. After all, as Bombardier's Navarri explains, "Trains are very much part of Europe's DNA." If so, it's a good omen for rail's future and a vindication of the old Taoist saying that "the journey is the reward" - especially if it's at high speed.